AUD/USD still ‘sticky’ but lower range in Q1 - Westpac

FXStreet (Delhi) – Robert Rennie, Research Analyst at Westpac, notes that the A$ has sat in a 0.70 to 0.74 range for much of the last 6 months and the weakness in commodity prices has been a key factor weighing on the A$.

Key Quotes

“Commodity price weakness should continue into 2016 given the extreme highs we are seeing in US crude inventory and rising iron ore inventory in China plus increased seaborne supply.”

“A$ is strong from non-traditional sources - real money investors including sovereign wealth funds, infrastructure funds and equity investors. However, our sense is the market is still too complacent on the Fed. The message the Fed gave us last week is they fully expect to raise rates another 4 times in 2016. The potent combination of a stronger US$, higher rates in the US, weaker commodity prices and increased risk aversion will see AUD/USD eventually fall below 0.70. While our short term fair value model still points to the A$ above 0.70, the environment we see early next year should see this model comfortably predicting AUD below 0.70 in Q1 next year. We have 0.68 by March and 0.66 by June as our official forecast.”

“So we remain sellers of AUD strength into and above 0.7250/ 0.7350. However, being short AUD has been a thankless task through much of Q4. In our view, it makes sense to consider lower cost option structures such as ‘seagulls’.”

“In terms of risks, given the profile of data in the US we expect to see in Q1, volatility into the March FOMC meeting may hold up well, and the structure has you short volatility. The other risk is that were AUD to trade above 0.7280, the position would be open to unlimited loss. However, we see limited risks of that scenario into Q1.”
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